Wall Street falters on profit taking, energy shares

Stocks slipped on Tuesday as the recent sharp run-up tempted investors to take profits and energy shares were pressured by a decline in oil prices.

Investors were also looking ahead to the release of government stress test results, due on Thursday, which may show about half of the 19 biggest banks under review need to raise more capital.

Financial shares have helped lead the market up more than 33 percent from the March bear market lows, while the broad S&P 500 turned positive for the year on Monday, spurred by growing optimism about the state of the banking sector and signs the economic slump may be waning.

We've had a really nice run, said Richard Sparks, senior equities analyst at Schaeffer's Investment Research in Cincinnati. I would characterize it as being a little pause, a little break.

The Dow Jones industrial average was off 12.03 points, or 0.14 percent, to 8,414.71. The Standard & Poor's 500 Index fell 4.70 points, or 0.52 percent, to 902.54. The Nasdaq Composite Index lost 17.28 points, or 0.98 percent, at 1,746.28.

On the economic front, data showed the services sector contracted less severely in April, providing fuel to recent sentiment the economy may have seen a bottom.

Adding to the brighter tone on the economy, Federal Reserve Chairman Ben Bernanke said the three-year U.S. housing bust may be near a bottom and that he expected the recession to end this year, barring a relapse of the financial crisis.

However, Bernanke also acknowledged growth would remain subdued and unemployment high.

Chevron was among the Dow's biggest weights, down 1.3 percent at $65.83, as oil futures fell below $54 a barrel on falling energy demand.

Shares of natural gas company Chesapeake Energy slid 9.7 percent to $20.60 after it said it sees a dramatic reversal of natural gas prices in fall or winter.

The KBW Bank index fell more than 1 percent, with Wells Fargo down 4 percent to $23.29, while Citigroup gained 5 percent to $3.36.

According to a source familiar with official talks between banks and regulators, about 10 of the 19 largest U.S. banks that have been put through government stress tests will be instructed by regulators to raise more capital.

The banks have been negotiating with the regulators about the depth of their capital needs should the recession prove to be deeper and longer than anticipated.

Investors are optimistic that the largest banks do not need dramatic new government interventions. Among banks undergoing the test, Citigroup, for example, has been told it will need to boost its common equity by about $10 billion, a person familiar with the matter said on Monday.

On the upside, Kraft Foods helped cushion losses on the Dow after the maker of household brands including Oreo cookies and Maxwell House coffee reported a higher profit. Like many companies this earnings season, Kraft said its results were helped by raising prices and cutting costs, sending its shares up 6.8 percent at $25.91.